Sri Lanka Government takes Key Steps towards Economic Stability

• CNL Reporter
• March 22, 2025
• Weekly Economic Review
• Economic Stability, Weekly Economic Review
• 0 Comments

WEEKLY ECONOMIC REVIEW

As of March 2025, Sri Lanka’s economy is showing signs of stabilization and growth, reflecting the government’s strategic efforts to ensure long-term economic prosperity. The country achieved a 5% GDP growth in 2024, marking a significant rebound from the financial crisis of 2022. This recovery was supported by a $2.9 billion bailout package from the International Monetary Fund (IMF), secured in March 2023, underscoring the role of international support in the nation’s economic revival.

The agriculture sector expanded by 8.3%, industrial output by 25.5%, and services by 57.5% during the year. The government’s commitment to fiscal discipline is evident in its 2025 budget, which aims for a primary budget surplus of 2.3% of GDP, aligning with IMF program requirements.

Inflation and Monetary Policy

Inflation has significantly moderated, with headline inflation recorded at -4% in January 2025, a sharp decline from its peak of 70% in September 2022. This drop is partly attributed to a reduction in power tariffs. The Central Bank projects inflation to rise towards the 5% target by the third quarter of 2025. Foreign exchange reserves remain steady at $6.03 billion, providing a buffer against external shocks. However, the Sri Lankan rupee has depreciated by 1.4% against the US dollar in the year leading up to March 21, 2025.

The Weekly Average Weighted Prime Lending Rate (AWPR) increased slightly by seven basis points to 8.44% for the week ending March 21, 2025. Meanwhile, the Average Weighted Call Money Rate (AWCMR) rose marginally to 7.95%. Reserve money also increased due to a rise in currency circulation, and total outstanding market liquidity showed a surplus of Rs. 155.98 billion by March 21, compared to Rs. 188.61 billion the previous week.

Financial Markets and External Developments

Sri Lanka’s stock market showed resilience, with the All Share Price Index (ASPI) increasing by 0.12% to 15,879.33 points, while the S&P SL20 Index rose by 0.68% to 4,766.57 points. Treasury Bills experienced a slight decline in yield rates across both primary and secondary markets, accompanied by a similar trend in Treasury Bonds.

However, foreign investor holdings in T-Bills and T-Bonds increased by 18% compared to the previous week. The T-Bill auction during the reporting week saw an oversubscription rate of approximately two times, indicating strong investor demand.

Additionally, the total volume of secondary market transactions in T-Bills and T-Bonds increased by 37.6% from the prior week.

Fiscal Policy and Tax Reforms

In an effort to increase tax revenue, the Sri Lankan government introduced amendments to the Inland Revenue Act, set to take effect on April 1, 2025. These changes include new tax proposals and modifications to existing personal income tax structures.

The amendments, tabled in Parliament on March 1, 2025, were passed without alterations following a brief 90-minute debate. The government aims to boost income tax revenue by 13.7%, reaching 1,167 billion rupees in 2025, compared to the 1,026 billion rupees collected in 2024.

Any slippage in revenue collection could threaten the IMF bailout program and critical policy reforms necessary to restore investor confidence. Although Sri Lanka has completed its local and external debt restructuring, economists warn that the country remains vulnerable to another sovereign default unless it enhances tax revenue, sustains economic growth, and increases export earnings.

Labor Market and Economic Productivity

The labor market shows signs of improvement, particularly in the tourism and service sectors, where job opportunities have increased.

However, structural challenges persist, including low labor force participation rates, especially among women. As of mid-2024, Sri Lanka’s overall labor force participation rate stood at 47.8%, with female participation at only 30%.

Treasury Secretary Mahinda Siriwardana emphasized the urgent need for a data-driven policy approach to address financial inequality, particularly in women-led businesses.

He highlighted that a lack of gender-disaggregated financial data hinders effective policymaking. To address this, the government has introduced the WE Finance Code, which mandates financial institutions to collect and report gender-specific data to the Central Bank. Siriwardana hailed the initiative as a “game changer,” advocating for more inclusive financial policies tailored to the unique needs of women entrepreneurs.

Energy Prices and External Factors

Between March 17 and March 21, 2025, crude oil prices exhibited volatility. Prices initially declined due to optimism surrounding Russia-Ukraine ceasefire negotiations but later rose due to a drop in U.S. fuel inventories, new U.S. sanctions on Iran, and an OPEC+ decision to cut output. Overall, Brent crude prices increased by $1.02 per barrel, while WTI crude prices rose by $0.30 per barrel during the period.

Conclusion

Sri Lanka’s recent economic indicators suggest that the nation is on a path to recovery, supported by strategic government policies and international financial assistance. However, challenges remain, including the need for sustained fiscal discipline, enhanced revenue generation, and improvements in labor market participation. With the right mix of policy reforms and economic strategies, Sri Lanka is poised to achieve long-term stability and growth in the years ahead.